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MeetMe, Inc. (NASDAQ:MEET)

Q2 2014 Earnings Conference Call

August 04, 2014 11:30 AM ET

Executives

Todd Kehrli - IR - MKR Group

Geoffrey Cook - CEO

David Clark - CFO

Analyst

Darren Aftahi - Northland Securities

Blake Harper - Wunderlich Securities

Amit Dayal - H.C. Wainwright

Ron Josey - JMP Securities

Justin Ruiss - Sidoti & Company

Operator

Good day, and welcome to the MeetMe Second Quarter 2014 Financial Results Conference Call. Today’s conference is being recorded.

At this time, I like to turn the conference over to Todd Kehrli of MKR Group. Please go ahead, sir.

Todd Kehrli

Thank you, operator. Good morning and welcome to the MeetMe second quarter 2014 earnings conference call. On the call this morning with me are MeetMe's Chief Executive Officer, Geoff Cook and Chief Financial Officer, David Clark.

Before we begin, I would like to remind everyone that during this conference call, management will make certain forward-looking statements, which convey management's expectations, beliefs, plans and objectives regarding future financial and operational performance. Forward-looking statements are generally preceded by words such as believe, plan, intend, expect, anticipate or similar expressions. Forward-looking statements are protected by the Safe Harbor contained in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to a wide range of risks and uncertainties that could cause actual results to differ in material respects, including those relating to our plans regarding new products and mobile monetization. Actual results could differ materially from those described in this conference call and presentation. Information on various factors that could affect MeetMe's results are detailed in the reports we filed with the Securities and Exchange Commission.

MeetMe is making these statements as of August 04, 2014, and assumes no obligation to publicly update or revise any of the forward-looking statements in this conference call.

In addition to GAAP results, we will discuss certain non-GAAP financial measures in this conference call, such as adjusted EBITDA. Our earnings press release for the second quarter of 2014 can be found on the news release link on the Investor Relations page of the Company's website, www.meetmecorp.com. The tables included with the earnings press release include a reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures. A replay of this conference call will be available at the Investor Relations section of the MeetMe Corp site again at, www.meetmecorp.com.

With that, I would like to turn the call over to our CEO, Geoff Cook. Geoff?

Geoffrey Cook

Thanks everyone for joining us today. Our mobile traffic and financial results in the second quarter demonstrate the gathering momentum in the business. In the quarter, we grew mobile revenue by up 114% on a year-on-year basis to $5.6 million, and by 20% versus Q1.

For the first time in our history, mobile revenue accounted for a majority of our total revenue. We also increased adjusted EBITDA by 93% on a year-on-year basis to $740,400 and by a total of $1.2 million versus a loss of $500,000 in Q1.

What excites us most is the strong progress we made in the quarter towards our primary goal of increasing mobile daily active users, ending the quarter with 864,000 average mobile daily active users in June, up 12% versus the Q1 average. What’s more, the momentum is building. We announced just last week that we hit 1 million mobile active users in a day for the first time in our history. It took us seven years to reach 800,000 mobile DAU, 19 months to reach 900,000 mobile DAU but it took us only six weeks to reach 1 million mobile DAU. We credit our mobile growth to our focus on Chat.

Our team is committed to making MeetMe the leasing platform for finding new mobile chat spots. As I noted on the last call, Chat is by far the number on feature on the MeetMe app. It is the lynchpin of our engagement mechanic and the primary way users build meaningful relationship on MeetMe. Our mobile chat sent per day are up more than 80% since March.

In the second quarter we made Chat faster and easier through enhanced real-time components, differentiated our Chat offering through seamless and femoral photo integration and solved problem of the empty Chat screen through the launch of Icebreakers.

In the second quarter, we also focused on driving the number and quality of new Chat conversation. We launched Friend Suggestions on iPhone to make it easy to make quality local connections. The launch of iPhone Friend Suggestions increased friend request sent on that platform by 60% in the first month. In addition, we increased the number of new conversations started by streamlining the product to funnel our highest volume notifications seamlessly into Chat.

Over the coming weeks, we intend to launch Friend Suggestions on Android, more than 60% of our mobile users use Androids, making it our largest platform by far. Given the dramatic impact of Friend Suggestions on iPhone and our new friend request and given that friends are more likely to engage in chat, we expect Friend Suggestions on Android to have an even bigger impact overall, given the large size of our Android audience.

We look forward to continuing to execute against an ambitious product pipeline to grow engagement and continue to expand our audience. Today, we announced the launch of our newest chat discovery product Hit Me Up. Appearing within the chat session Hit Me Up makes it easy to find new chat partners willing to chat right now. One aspect of quality chat interaction is immediate replies. Hit Me Up is designed to find someone who wants to chat right now, since the recent launch of Hit Me Up on iOS last week we’ve seen ice breaker activity increased nearly 50% and new conversations increased 8% on our platform. We are excited about this new feature that it’s potential to grow our mobile user interaction.

We also look forward to comprehensive redesign of our mobile app plans in October to make them simpler, faster and even more feared around chat. We will carefully A/B test and design as well as various on boarding floors for new users, kind of, we expect this optimizations will also increase engagement and ultimately drive both DAU and revenue.

We also have a number of premium products planned to more directly monetize chat through virtual currency. Today we have a number of successful spotlight virtual currency products that help our members meet new people faster, but none of our current spotlights are directly aimed and driving more chat activity for users.

We are excited to have a number of new virtual currency products planned for the second half of the year that focus on providing premium services inside of chat directly.

Further out, our pipeline focus is on increasing the quality of chat partners by better leveraging the data on the platform as well as by facilitating connections around shared interest and other natural [indiscernible].

Finally, I’d like to say a brief word on our second quarter financial performance. Our top-line revenue increased 12.7% year-on-year to $10.7 million, reflecting 114% growth in mobile to $5.6 million offsetting a 36% decline in web to $3.6 million. While we are managing the rate of web decline by optimizing CPMs and launching new web functionality we expected a decline in web to continue, albeit now offer smaller base. And we continue to accept their growth in mobile through our pace of decline web.

Our mobile revenue growth is been driven by gain in advertising revenue. Mobile ad impressions in Q2 were up 136% year-on-year to 10.7 billion and CPMs increase 29% to $0.43. We believe that largely advertising driven model enable us to monetize the widest audience, well, providing a best user experience with our payroll and dramatic limit communication engagement on the platform.

We’ve built that we believe to be an industry leading mobile monetization infrastructure around this experience. With mobile ARPU reaching an all-time high of $2.19 in Q2 ahead of even Facebook's a $1.55 in Q2.

I couldn’t be more excited by the progress we made in the quarter, our team is committed to making MeetMe the leading platform for finding new mobile chat partners. It is my great honor to work with such talented people on a daily basis to create innovative products that touch the lives of millions of people.

The company's gathering mobile momentum is a testament to the team’s hard work and dedication. I look forward to continuing to execute against an ambitious product pipeline to deliver ever expanding mobile traffic and revenue and ultimately drive shareholder value.

With that, I’ll turn it over to David.

David Clark

Thanks Jeff. Our second quarter results reflect the continued momentum and growth in the business driven again by strong mobile revenue growth that more than offset declines in our legacy web business. We anticipate growth in this range to continue in the third quarter as we continue to focus on developing new product design to drive mobile user growth and engagement.

Total revenue for the second quarter was $10.7 million up 13% from $9.5 million a year ago. Growth was once again led by mobile where revenue increased 114% to $5.6 million in the quarter with the bulk of the quarter’s mobile attributable to advertising.

Mobile is now 53% of total MeetMe revenue up from 28% a year ago. Growth in impressions in CPMs drove an increase in our mobile quarterly average revenue per user or ARPU which increased 123% to $2.19 in the second quarter, up from $0.98 a year ago. Once again, mobile ARPU exceeded second quarter web ARPU which was $1.28.

Mobile average revenue per daily active user or mobile ARPDAU was $7.04 in the second quarter up 100% from $3.07 a year ago and once again compared favorably to Facebook’s estimated $2.08 second quarter mobile ARPDAU. Web ARPDAU was $13.02 in the quarter. Overtime we believe mobile ARPDAU has the potential of grow to and even exceed web ARPDAU given the heavy user engagement in mobile devices.

Web revenue was $3.6 million in the quarter down from $5.6 million a year ago. And from an operational perspective we continue to do a good job managing our costs, while our revenue in a quarter was up 13% operating expenses were up only 5%.

For the second quarter we spent a little over $500,000 or 5% of revenue on marketing. Year-to-date we spent 6.5% of revenues on marketing and we anticipate spending in the 5% to 7% range for the remainder of the year.

For the quarter, we reported adjusted EBITDA of $740,400 which represents significant improvement compared to $384,000 a year ago. Adjusted EBITDA for the second quarter adds back 1.1 million of depreciation and amortization, 1 million of stock based compensation, $242,000 of interest expense and $182,000 of non-cash decrease in our warrant liability. A reconciliation of GAAP and non-GAAP measures such as adjusted EBITDA is included in our SEC filings and in the appendix of the presentation now posted on our Web site.

We generated positive cash flow from operations in the quarter of $1 million and used $800,000 of that cash to retire debt. We ended the quarter with cash and cash equivalents of $5.8 million, following the closest second quarter though we further strengthened our balance sheet with a successful equity offering in which we raised an additional $10.5 million in net proceeds.

Now turning to guidance, we expect third quarter overall revenue to grow roughly 10% to 15% year-over-year with growth once again coming from mobile. We are reiterating our full year revenue guidance of $42 million to $47 million and within this range we continue to believe that we will be EBITDA and cash flow positive for the full year.

The rate of revenue growth for the first six months was in line with the high end of our total revenue growth expectations for the year. For the balance of the year we will be comparing this quarter’s to reflect the early success of our mobile advertising initiatives in particular the full launch of feed ads in the second half of last year.

We are optimistic about our growth expectations given our recent growth in mobile usage however that traction will need to continue to build and sustain for us to achieve the high end of our revenue guidance. As we move into the second half of the year, our team remains singularly focused on growing usage and capturing an increase in share of the substantial addressable market we serve. And as Geoff mentioned we have a new product pipeline that we believe will drive that growth. In addition, we believe the rapidly increasing adaption and usage of smart devices and increased advertising on those devices bodes well for our long-term success.

Before I conclude I want to note that MeetMe will be presenting at the upcoming Needham Interconnect Investor Conference tomorrow August 5th in New York City. If you are in town when we are there or like additional information on our Company, please feel free to contact us and we'll arrange a meeting.

And with that operator, we can open it to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we will take our first question from Darren Aftahi.

Darren Aftahi - Northland Securities

Hi guys, thanks for taking my questions. Just three if I may and first, Geoff, I know in the past you guys have talked about that number of times mobile users are logging on per day impressions et cetera, wondering if you may be update those statistics? And then I got few follow-ups.

John Idol

So, in terms of the mobile DAU, I would say what we talked about was increase of -- to 837,000 in the quarter. Mobile sessions in the quarter were up sequentially by about 20% to 929 million. What was the other question, sorry? And ad impressions were up to 10.75 billion that was 25%.

Darren Aftahi - Northland Securities

Got you and then where are you guys in terms of monetizing chat in any form? I know you talked about doing that and have a lighter version in 2Q towards the end. But can you give us a real-time update of what you are actually monetizing within chat?

And then last question is for David, so on use of proceeds, if you assume growth, number one in your business and then the cadence of cash flow will you continue to use excess cash flow to pay down debt, maybe just some higher level thoughts on capital allocation with the new financing. Thanks.

Geoffrey Cook

Yes, so the chat question and this is Geoff, on the chat question, every screen of chat today has an ad of 320 by 50 ad typically which is what we call our traditional mobile banner ad, Going forward, we do have some thoughts around what other forms of native advertising we might be able to pull into chat although we have announced no plans to date. We also plan to launch multiple virtual currency products in the fourth quarter aimed at monetizing chat directly.

Right now, though virtual currency, right now all of our spotlight products tend to be aimed at increasing profile views or increasing friend requests, increasing the number of matches made, we have some products in the pipeline where the products themselves -- the premium products will drive more chat. And we think those will be reasonably received and we intent to put them towards the center of our user experience.

David Clark

Darren, so to answer the question from me on the proceed, yes, we will prioritize using any free cash flow prioritize paying down debt but the cash we’ve raised was also raised with a mind towards potential growth opportunities. As we said on the road, there are small opportunities that we don’t even bother or we traditionally did not even bother to look at in the past given we felt like we had adequate cash but just enough to sort of run the operations and achieve our growth -- our existing growth plan. Now we have the opportunity to be a little more opportunistic. We have nothing imminently planned, so right now with the strength in the balance sheet and as I said this additional $10 million that we came in last week.

Operator

We’ll take our next question from Blake Harper with Wunderlich Securities.

Blake Harper - Wunderlich Securities

Thanks for taking my questions guys I had a few, first to start off with the incremental growth you’re getting from these users. Can you talk talked Geoff maybe are there different channels that you’re acquiring them from or is you’re seeing the same thing as you were before with how you have the users want the platform?

Geoffrey Cook

So, we’re mostly focused on in Q2 and this quarter as well really driving up our DAU to MAU ratio. So what Chat has -- the effect we’ve been seeing with Chat that chats are up 80% Chat is very effective at getting users to reengage, the likelihood of replying to a Chat is quite high and Chat will send a push notification to a user’s device which then leads that user to reengage. And so because chats are DAU is up simply because the DAU to MAU ratio had ticked up by about 1% or 2% in the quarter on mobile.

In terms of where we’re seeing new users come from it’s through the typical channel and we ran quite well if you search for say Chat on iPhone in the App Store or if you search meet new people in the App Store or meet new people on Android or Chat on Android we tend to rank in the top two or three results for a number of different terms. We also spend 5% of our revenue this quarter on marketing directly to mobile users, which is basically unchanged.

Blake Harper - Wunderlich Securities

And then could you talk maybe somewhere you think about your ad load right now. Do you think there is room to increase that there and [indiscernible] the user experience or you think you’re kind of full there and just how do you think about where you are right now as far as your ad load?

Geoffrey Cook

Yes, so ad load in Q2 was around 11.6 ads per mobile session which was up about 3% or 4% versus the 11.2% in Q1. So, ad load is more or less flat between Q1 and Q2. In terms of what we expect coming forward I wouldn’t expect big increases in ad load, it’s worth noting that ad load on the web is quite a bit higher obviously web screens are quite a bit larger. Ad load on the web is about six times higher than ad loads on mobile.

Where I could see additional ad load would be actually inside of Chat. Right now we have native advertising inside of feed, we have native advertising inside of our local product, but to-date we have no native advertising inside of Chat. I think we’ll keep it that way for a period of time but that would be a place where we would experiment in the future.

Blake Harper - Wunderlich Securities

And then one more if I could. Could you just talk about maybe updated tier on your standalone app strategy and what maybe the time would be for a new app release? And then also how are you thinking about your engineering resources right now as far developing new products that you’ve done for the core MeetMe app as that shipped in more to do that like you’re talking about with the premium products and with Chat compared to developing something that’s standalone? That’s all I have, thanks.

Geoffrey Cook

Sure. So, on the standalone side, we tend to view our standalone app strategy as around inexpensive user testing of different ideas. And so in that vein we’ve actually seen some success. With respect to our Choosy app we liked what we saw when we launched it. It takes us only about two or three developers for about two or three months to build the standalone app whereas the same feature for a million daily active users on MeetMe would take multiples of that in terms of both time and resources.

And so what we saw with Choosy was that -- and Choosy was an app that we launched standalone to about 10,000 and 20,000 users of MeetMe. What we saw was that the sessions per user was quite high, the fundamental concept behind it of breaking the ice and having users connect over something more than kind of superficial first messages was a quite -- was essentially proven by the launch. And we ended up launching that as a standalone I believe in January and then bringing that feature to MeetMe in the form of Icebreakers in June. So there is an example of basically our standalone pipe affecting the MeetMe pipe.

In other cases in the case of Charm I don’t think we liked what we saw in terms of the friction to video and so we discontinued support of Charm. In terms of where our debt resources are allocated they are 90% allocated against the core MeetMe pipeline. At the same time we continue to do some experiments around different standalone apps and I would continue to plan the launch at least one app a quarter, I don’t think we’ll always put out a press release when we do but they will be there under our developer accounts in either iPhone or Android. And towards the same vein as other, essentially market testing different functionality.

Operator

And we will take our next question from Amit Dayal, H.C. Wainwright.

Amit Dayal - H.C. Wainwright

Could you talk a little bit about how your marketing strategy may change going forward with the additional new financing in place now, should we expect a bit more aggressiveness on that side to may be generate perhaps the user growth for these offerings that are been put on the market right now?

David Clark

We just -- we said we’re anticipating spending 5% to 7% of revenue on marketing, we spent 6.5% year-to-date. We don’t have any imminent plan to change it, should we find a marketing channel or unique marketing opportunity, we now feel like we have a cash potentially pursuit it but we have no near term plans, you’re not going to see marketing run up beyond the 7% of revenue range in the short term.

Amit Dayal - H.C. Wainwright

And the share comp going forward should be -- how much should we be using for modeling purposes?

David Clark

It is 44,722,000 post the offering.

Amit Dayal - H.C. Wainwright

Okay. Perfect. And in terms of the product pipeline Jeff, could you give us any additional color on what may be coming down post this new app that you launched I guess -- announced today?

Geoffrey Cook

Sure, so I think as I mentioned in the prepared remark I think the types of products we'll be launching are really aimed at increasing the quality of chat partners and the quantity of chat.

On the engagement side we continue to be very focused on chat and we think we can improve the quality of chat partners by leveraging the data on the platform that we have already but in many cases do not use. As well as building out additional functionality around matching people based on interest or affinity.

In terms of the Hit Me Up product that we launched today, one of the key ways people measure how -- their user satisfaction is how were likely or they do get a chat when they were actually available and ready to chat. And Hit Me Up is a quite -- is a simple product but one that's clearly moving some number -- some of our numbers on iOS and will soon be up to 100% of our Android users.

In terms of -- so that’s a one vein of product development which is growing engagement through chat. Another is growing monetization and I’d say on that front we have monetization products that are really aimed at growing the likelihood of someone to receive a chat and so we have a couple of different takes on that concept that we will be launching in the fourth quarter.

Operator

And we will take our next question from Ron Josey, JMP Securities.

Ron Josey - JMP Securities

So three please, first on just sort of high level, Jeff, can you talk about given that mobile DAUs are driving new users certainly new products are going to help and adoption of chat is sort of the key, but can you talk about maybe opportunities around segmentation and at what point do you think that’s even possible, is it closer to 1.5 million DAUs or is it closer like 5 million DAUs before we should even start talking about that. And I have two follow-ups.

Geoffrey Cook

So when you refer to segmentation you refer by interest for infinity group that…

David Clark

Yes, it is by interest affinity group given your user base is now potentially over 1 million at least it was that we can…

Geoffrey Cook

I think we could do that today. I don’t think that there is -- I think we have the scale to do different, to start making some strides with respect to matching around interest and having interest and infinity become part of app. So I don’t view that as a question of hitting some future DAU target in order to go down that path. I think we’re there today. It’s clear of course that the quality of such a product was only increased, given increasing growth in DAU. But I think there’s enough of our users who would have such, would have demand, our surveys of users indicate that there’s enough demand for such a product today that we believe it could be successful today.

Ron Josey - JMP Securities

Got it. That’s helpful. And then David on margins they expand here 300 bps year-over-year, longer term, can you help us understand why you think margin should go given you’re still in, and likely will continuing to invest in the product and marketing and [indiscernible] that would be helpful.

David Clark

By longer term, Ron, you mean future years?

Ron Josey - JMP Securities

Sure or maybe we are talking about where margins were today and they continue to expand going forward, can we expect to continue sort of margin expansion here? And then maybe your long-term financial model, if you have disclosed that in the past.

David Clark

Yes, we have not but we do talk about the fact that if you look at our record quarter we had in the fourth quarter of last year, I think we did about an 18% EBITDA margin in that quarter and it really shows the leverage in the model because to support both higher users but then more important higher revenue loads especially where advertising is concerned we certainly do not have to proportionate increased expenses. So, the expectation would be that once we hit scale, we can do the type of margins you traditionally see in social which are upwards of 40% and this is just a matter of building that scale through additional DAU growth and then obviously we feel very good about where the mobile advertising market is going from the CTM perspective.

Ron Josey - JMP Securities

Right and scale meaning…

David Clark

I knew I was going to -- [indiscernible]. I think if you look at what we did in the fourth quarter of last year and of course it was seasonal, so that wasn’t recur in the first quarter but that would suggest about a $60 million, little less than $60 million revenue rate. We are not predicting when that’s going to happen but that gives you a sense of what scale might mean.

Operator

(Operator Instructions). And we will take our next question from Justin Ruiss, Sidoti & Company.

Justin Ruiss - Sidoti & Company

Just had a quick question and on the prepared remarks Geoff you have mentioned that in October you would be doing a full application redesign. Can you just speak more to that and what cost might be associated with it when going forward?

Geoffrey Cook

Sure, it’s really a question of allocating debt resources, so there is no incremental cost associated with debt redesign. We redesigned our apps or our website from time to time often reasonably frequently on mobile and what this particular one is -- and our headcount it stands at about a 130 today versus about a 128 a year ago. In terms of the goal of the redesign, we have obviously seen chat come to the four and chat is growing dramatically versus where we were just the beginning of this year and we believe that the current navigation could be clearer in terms of surfacing high quality chat partners kind of further up the navigation and just making the app generally cleaner and easier to get around in order to facilitate chat. We also think by redesigning the product, we can create inventory for new premium products that I talked about, new premium products to drive the number and the quality of the chat partners that we are facilitating.

Operator

At this time, there are no further questions. I will turn it back to management for any further remarks.

Geoffrey Cook

Thank you all for dialing-in today and we look forward to seeing people as we continue to be on the road of conferences. Thank you.

Operator

This concludes today’s conference. Thank you for your participation.

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